This Calm Shall Pass, Too

Equity futures buckled a bit after the first congressional race was called for the Democrats – early, and with a wide margin that maybe said this “blue wave” was real.

As more results came in, futures recovered ground, steadied, and started to point to a positive open.

After all, what happened was basically in line with expectations. Democrats did take control of the House of Representatives, and that presents a challenge to President Trump.

But he’ll respond as he’s always responded, and that means a lot of unpredictability from the Commander-in-Chief of the most powerful nation on the planet.

I, for one, am ready for whatever he stirs up; indeed, Trump plus “normalization” by the Federal Reserve could translate into a lot of volatility in the U.S. Treasury market.

And we’re prepared to profit from it.

It’s Like the Eye of a Storm…

It’s actually a little quieter this “mornrning after” than I’d anticipated. Indeed, stocks are well into positive territory, and bond yields continue along this still-new uptrend.

It certainly stands in stark contrast to the run-in to the midterms, including last Monday’s 900-point intraday swing for the Dow Jones Industrial Average.

By Friday, however, stocks had come well off those lows. And the release of the October employment report by the Bureau of Labor Statistics (BLS) added additional fuel to the “strong economy” narrative.

At the same time, those fresh BLS numbers support the Federal Reserve’s current policy track, so another rate hike in December is a near-certainty.

I guess we can forget about September’s paltry gain of 134,000 new non-farm jobs. That dud drove expectations for October down to 190,000, but this economy created 250,000.

It’s an all-around winner: Private payrolls increased by 246,000 versus a forecast of 181,000, and manufacturing jobs grew by 32,000 against an expectation of 13,000.

The unemployment rate was steady-as-expected at 3.7%. And the labor force participation rate surpassed the forecast of 62.8% and crept up to 62.9%.

The pace of growth of average hourly earnrnings slowed to 0.2% from 0.3%, as expected. Year-over-year wage growth provided a substantial surprise by accelerating to 3.1% from 2.8%.

It seems as if everyone who wants one has a job.

The yield on the long U.S. Treasury bond surged on the BLS release, rising from 3.39% to 3.45% at Friday’s close.

We’re seeing some considerable easing this mornrning, with the yield on the 30-year back to 3.39%.

As I’ve noted, we don’t care about “direction.” We care about “movement.”

“Movement” creates “opportunity.”

We Need To Talk About Manufacturing

Let’s be real: The U.S. manufacturing sector’s been on fire for over a year.

That’s important to keep in mind in the aftermath of last Thursday’s release of the Institute for Supply Management (ISM) Manufacturing Index for October.

It came in at 57.7. The market wanted 59.1.

Here’s the thing: Any reading above 50 indicates “expansion.”

The good news, of course, is we’re still well above 50. Of course, underlying data suggest we need to keep a close eye on the longer-term trend; is it changing?

New orders came in at 57.7. That’s down 4.4%, and it’s the first sub-60 reading since April 2017.

But prices paid jumped 4.7% to a reading of 71.6, and tariffs seem to be causing shortages as the result of “pre-buying.” We’ll see if this persists and begins to impact consumer prices.

Production slowed by four points, and employment slowed by two points but, both are coming off very high levels.

Overall, the October ISM is a disappointment. The question is whether the Fed will take notice.

We won’t find out until December. The Federal Open Market Committee (FOMC) is meeting tomorrow, but this is a “dead” meeting, with no policy moves, statements, or press conference.

The ISM number is not cause for panic, or even “concernrn.” But it is a sign of potential trouble ahead.